The strong inflow of migrants is great news for moderating wage inflation, though, economist says
New Zealand is experiencing a “massive surge” in net migration, which is helping alleviate the country’s “excess demand” for workers, BNZ economists said.
This raises big questions, however, as to how strong the population-led growth might become, and how this might delay the Reserve Bank of New Zealand from easing monetary conditions.
In a BNZ publication, which showed unemployment remained unchanged at 3.4% while employment lifted 0.8% in the March quarter, Stephen Toplis (pictured below), BNZ head of research, said the data is starting to reveal “the true state of the current excess demand in the labour market.”
“Rather than underlying demand for staff unexpectedly increasing, per se, businesses are simply being able to fill vacant positions with the inflow of migrants,” Toplis said. “Only time will tell just how big that excess demand was/is but with net migration inflows continuing to accelerate, we do know the pressure to find staff is already moderating.”
Toplis said the bank’s economists are “watching the rapid increase in migration with great interest.”
“We are not convinced we have this adequately incorporated into our growth forecasts for the economy,” he said. “Could it be that soaring migration coupled with the ongoing recovery in tourism numbers might claw the economy into expansion territory in the second half of this year in contrast to our contractionary expectation? It is certainly something to be contemplated.”
The New Zealand economy is expected to tip into recession this year, with RBNZ conceding that it was trying to engineer the recession in order to bring inflation, which was at a 6.7% annual rate as of the March quarter, back into the targeted 1% to 3% range.
The NZ economy has been experiencing heat mainly due to a tight labour force, with employers unable to fill job vacancies with migrants because of closed borders. This has changed with the reopening of borders, with migrant workers now flocking in again to enter the workforce. Ministry of Business Innovation and Employment (MBIE) figures showed that a monthly record number of more than 20,000 people arrived in NZ shores on work visas in March.
Toplis said while it would be “nice” to avoid recession, how “nice” it will be depends on the relative supply and demand impulses associated with the rise in net migration.
“If the supply effects outweigh the demand effects, then we could see inflation diminish faster than expected at the same time the economy is unexpectedly strong,” he said. “On the flip side, if the demand impulse overrules the supply effects it would take inflation longer to fall to the RBNZ’s target and could even necessitate more tightening than anyone is so far bargaining on.”
The central bank has been aggressively hiking the cash rate in a bid to tame inflation. The OCR has spiked from just 0.25% at the start of October 2021 to the current 5.25%, with wide expectations of a further rate rise to 5.5% later this month at the next OCR review, interest.co.nz reported.
“For us, the strongest message from [the labour market] data, and much of the other data we are currently witnessing, is that the Reserve Bank will not be easing any time soon,” Toplis said. “If we are right about the evolution of the economy, it will be well into next year before this will happen.
“While there are mitigating factors, we do believe the state of the labour market is sufficiently tight that it lends support to the RBNZ raising rates one more time (25 basis points) when it meets later this month. And, generally, we think there is enough uncertainty that it won’t rule out the possibility of further tightening thereafter.”
Read the full BNZ report here.
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